Equity markets and personal taxation: The ex-dividend day behaviour of Finnish stock prices

Abstract

This paper analyzes the ex-dividend day behaviour of stock prices in the Finnish stock market. The tax structure in Finland is strikingly similar to the new tax structure in the U.S. which was for the first time in effect during the fiscal year 1987. The results in this paper may thus also illuminate the ex-dividend day behaviour in the U.S. stock markets under the new tax law. Our empirical data show that the average drop in the stock prices on their ex-dividend days has been 90% of the amount of the dividend during the years of 1974 to 1985. This is shown to be consistent with the tax explanation taking into account the Finnish tax laws. It is especially shown that the marginal seller on the ex-dividend days is an individual investor with a marginal tax rate of approximately 50%.